Banks

JPMorgan is poised to be first foreigner to get a majority stake in a China mutual fund business

Key Points
  • JPMorgan Chase could become the first foreign company to own a majority stake in its Chinese mutual fund business.
  • The bank's joint venture partner put a crucial 2% of the business up for sale and analysts expect the Wall Street bank to lap it up.
  • Under new rules announced in late 2017, foreign asset managers can own up to 51% of their Chinese mutual fund joint ventures, but so far no company has managed to do so.

JPMorgan Chase could become the first foreign company to own a majority stake in its Chinese mutual fund business, after its joint venture partner put a crucial 2% of the business up for sale that analysts expect the Wall Street bank to lap up.

A move by JPMorgan towards that goal would come at a tense time in U.S.-China ties, as Chinese Vice Premier Liu He is set to continue trade negotiations with the United States that were roiled after U.S. President Donald Trump said on Sunday he would raise tariffs.

Under new rules announced in late 2017, foreign asset managers can own up to 51% of their Chinese mutual fund joint ventures, though, so far, no company has managed to do so.

J.P. Morgan Asset Management (JPMAM) currently owns 49% of China International Fund Management (CIFM), while Shanghai International Trust, belonging to Shanghai Pudong Development Group, owns 51%.

Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co, at a luncheon hosted by The Economic Club of Chicago on November 22, 2017 in Chicago, Illinois.
Scott Olson | Getty Images News | Getty Images

Shanghai International Trust said in a posting on the Shanghai United Assets and Equity Exchange website it is auctioning a 2% stake.

"This is a very, very critical step because this potentially could open the doorway for a number of other deals to begin working their way through the process," said Peter Alexander, founder and managing director of fund consultancy Z-Ben Advisors.

Alexander added he had "a high conviction level" that JPMorgan will be the buyer and that the purchase price will be watched closely, as it will offer a guidance on the premium foreign firms need to pay for control of a Chinese fund venture.

The open bidding process begins on May 8, and will continue until June 4.

Last year, JPMorgan said that its asset management unit was "pursuing its desire and intent to increase its current joint venture stake in China International Fund Management to a majority interest."

A spokeswoman for JPMAM declined to comment on Shanghai International Trust's move.

Were JPMAM to win the auction, it would still need approval from Chinese regulators to reach 51%.

Morgan Stanley became the largest shareholder last month in its joint venture, but remains short of majority control.

A number of foreign asset managers, including JPMAM, wholly own companies in China which hold private securities fund management licenses. However, these licenses do not allow them to sell products to mass market retail investors, something that is allowed for mutual fund management joint ventures.

Lack of access to the China market for foreign companies, including financial services firms, is one major area of contention in the trade dispute between China and the United States, and Z-Ben Advisors' Alexander said that the stake auction by JPMorgan's Chinese fund partner could be seen in the context of the trade talks.

"You know this could have been done ages ago. Why now? I don't believe in coincidence," he said.

Watch: How JPMorgan became the largest bank in the US

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How JP Morgan Chase became the largest bank in the US
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Jamie Dimon, CEO of JP Morgan Chase, speaking at the 2019 WEF in Davos, Switzerland on Jan. 23rd, 2019.
Adam Galica | CNBC